UC-NRLF 


$B    ESQ    EM7 


BANK    DEPARTMENT  SERIES --II 


Accrued  Interest  Receivable 
and  Payable 

By  HOWARD  M.  JEFFERSON 


The  Bankers  Publishing  Co.,  New  York 


GIFT   OF 


Digitized  by  the  Internet  Archive 

in  2007  with  funding  from 

Microsoft  Corporation 


http://www.archive.org/details/accruedinterestrOOjeffrich 


Accrued  Interest  Receiv- 
able and  Payable 

An  Accurate  Daily  Statement 


BY 

HOWARD  M.  JEFFERSON 

Auditor,  Federal  Reserve  Bank  of  New  York 


New  York 

Bankers  Publishing  Company 

1918 


•:  • 


Copjrright  1918 
The  Bankers  Publishing  Company 


•  •  •' 

•  •  •  • 


•   •  •   •  «•  • 


*  •  • 


i 


CONTENTS 

Page 

Preface  3 

Introduction 9 

Interest  Accrued  Receivable 17 

Unearned   Discount 43 

Expenses ...  57 

The  Daily  Statement 73 

Appendix 83 

How  to  Calculate  Interest  Accrued  and  Un- 
earned Discount: 

Interest    83 

Discount     89 


415514 


PREFACE 


PREFACE 

r^  ONSIDERABLE  discussion  has 
^^  followed  the  appearance  of  the 
memorandum  on  the  call  of  the  Comp- 
troller of  the  Currency  of  December  20, 
1917.   The  memorandum  reads  as  follows : 

As  it  has  been  the  custom  of  many  nation- 
al banks  to  credit  discounts  as  collected  di- 
rectly to  profits,  and  to  credit  profits  with 
accruing  interest  only  after  collection,  it  has 
been  thought  proper  to  give  the  banks  a  rea- 
soiiable  time  to  make  the  adjustments  which 
will  be  required  in  order  to  report  accurately 
Items  21  (Interest  earned  but  not  collected) 
and  26  (Interest  and  Discount  collected  or 
credited  in  advance  of  maturity  and  not 
earned) . 

Therefore,  national  banks  may  exercise 
their  discretion  on  this  call  as  to  including 
these  Items  21  and  26  in  this  Report  of 
Condition.     Banks  will,  however,  be  required 

c»] 


:     i  PREFACE 

to  report  these  items  correctly  later  on,  when 
they  shall  have  had  a  reasonable  opportunity 
to  adjust  their  books  to  show  these  items 
accurately,  and  shall  have  received  more  ex- 
plicit directions  to  this  end. 

The  practice  of  accruing  interest  daily 
and  of  crediting  discount  only  as  earned 
is  not  new  nor  is  there  anything  compli- 
cated in  the  process.  The  really  startling 
fact,  to  the  student  of  accounting,  is  that 
banks  ever  should  have  followed  the  prac- 
tice of  crediting  income  as  received  instead 
of  as  earned. 

The  installation  of  a  system  of  daily 
accruals  of  earnings  should  appeal 
strongly,  but  why  stop  there?  Interest 
payable  is  of  the  same  genus  as  interest 
receivable.  If  the  latter  accrues  daily  so 
does  the  former.  The  debit  accounts  for 
rent,  taxes,  salaries  and  other  expense 
items  have  a  way  of  increasing  from  day 
to  day. 

In  the  pages  which  follow,  the  author 

[4] 


PREFACE 

describes  in  detail,  with  proved  figures,  a 
system  of  accruing  all  earnings  and  all 
expenses.  The  material  may  appear  in- 
tricate to  the  casual  reader,  but  it  will 
undoubtedly  be  appreciated  by  the  prac- 
tical man  who  is  called  upon  to  put  the 
system  or  any  part  of  it  into  operation. 
The  journal  entries  should  be  clear  to 
any  one  familiar  with  a  journal  and  a 
ledger.    For  those  who  are  not,  the  terms 

Unearned   Discount ,.  .$100.00 

to 

Discount    Earned $100.00 

placed  in  this  position  are  intended  to 
convey  the  idea  that  the  account  "Un- 
earned Discount"  is  to  be  debited  $100.00 
and  the  account  "Discount  Earned"  is  to 
be  credited  with  a  like  amount. 

The  number  of  tickets  suggested  should 

not  stand  in  the  way  of  the  installation 

of  the  system.     These  may  be  printed  so 

all  that  needs  to  be  done  each  day  is  to 

[5] 


PREFACE 

fill  in  the  amounts  of  the  various  entries, 
date  the  tickets  and  send  them  through. 
It  is  generally  recognized  that  errors  are 
avoided  in  both  preparing  and  recording 
constantly  recurring  entries  if  they  are 
printed. 

Given  an  accurate  accrual  of  earnings 
and  expenses  each  day,  the  closing  of 
the  books  ^vill  cause  no  heart  rendings 
because  the  accrued  receivables  turned 
out  so  much  less  than  it  was  assumed 
they  would  be.  The  accrued  payables 
will  not  add  their  quota  to  the  misery. 
The  "Calls"  may  be  prepared  with  actual 
figures  instead  of  being  estimated,  and 
with  much  saving  of  time  and  worry. 

H.  M.>. 


[6] 


INTRODUCTION 


CHAPTER   I. 

INTRODUCTION 

\  BANKER  discounts  a  note  for 
^^"^  $6,000  having  thirty  days  to  run, 
at  six  per  cent  and  passes  the  following 
entries  through  his  books: 

Bills   Discounted $6,000 

to 

Individtial   Depofiits $5,970 

Discount  Received SO 

On  the  same  day  he  makes  a  time  loan 
of  $6,000  for  thirty  days,  interest  pay- 
able at  maturity,  also  at  the  happy  rate 
of  six  per  cent.  His  general  bookkeeper 
finds  the  following  entries  to  be  posted: 

Time   Loans $6,000 

to 

Individual   Deposits $6,000 

[9] 


ACCRUED    INTEREST 

Thirty  days  later  the  discounted  note 
matures  and  is  automatically  charged 
against  the  borrower's  account.  The  fol- 
lowing entries  are  passed: 

Individual   Deposits $6,000 

to 

Bills    Discounted $6,000 

The  other  borrower  calls  with  his  check 
for  $6,030  and  receives  back  his  note  and 
the  collateral,  if  he  left  any  when  the 
loan  was  made.  The  banker  passes  the 
following  entries: 

Cash  (or  Individual  Deposits) ,  $6,080 
to 

Time  Loans $6,000 

Interest  Received SO 

Both  transactions  have  been  carried 
through  the  books  incorrectly.  It  is 
generally  considered  that  the  two  errors 
make  the  matter  right  by  the  principle 
of  offset,  but  a  few  minutes  study  of  the 

[10] 


RECEIVABLE    AND    PAYABLE 

figures  shown  in  Figure  1  will  demon- 
strate conclusively  that  even  the  net  fig- 
ures are  in  balance  but  twice,  once  on  the 
fifteenth  day  and  again  on  the  thirtieth 
day.  And  the  latter  happens  to  agree  only 
because  the  transactions  are  completed 
simultaneously.  If  they  had  continued 
three  or  four  months  the  error  would 
have  continued  and  the  discrepancy  on 
each  day  except  the  one  in  the  middle 
would  have  been  greater  because  the 
amount  of  the  profit  is  greater.  The 
table  will  also  illustrate  the  discrepancies 
in  the  case  of  the  $6,000  discount  and 
loan  above  mentioned. 

Suppose  a  few  ciphers  are  added  to  the 
$6,000  items  used  to  increase  the  invested 
assets  to  say  $6,000,000,  the  error  in  the 
first  day's  earnings  will  be  $28,000.  In- 
crease the  loans  to  $60,000,000  and  the 
error  on  the  first  day  will  be  $280,000.  If 
there  is  such  a  wide  divergence  from  the 
true  status  when  discounts  and  loans  of 


COMPARATIVE  STUDY  OF  DISCOUNT  AND  IN- 
TEREST   EARNED    AND    RECEIVED   ON 
NOTES   OF   $6000    EACH,   RUNNING 
THIRTY  DAYS  AT  6  PER  CENT. 


& 

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•Over,     t  Short. 


Figure  1. 


RECEIVABLE    AND    PAYABLE 

exactly  the  same  amounts  and  rates  are 
compared,  what  confidence  can  be  placed 
in  figures  so  radically  different  as  is  ac- 
tually the  case  in  every  bank  and  trust 
company. 

The  method  of  determining  the  true 
status  of  these  earning  accounts  is  so 
extremely  simple,  so  inexpensive  to  oper- 
ate, and  so  satisfactory  to  every  one  who 
watches  the  figures  that  every  bank  and 
trust  company  in  the  countr^  should 
establish  the  proper  accounts  without 
delay. 

Having  established  an  accurate  daily 
accrual  of  earnings,  we  have  only  to  ap- 
portion expenses  in  a  similar  manner  and 
we  have  an  absolute  statement  of  condi- 
tion each  day.  Moreover,  with  such  ac- 
curate figures,  it  follows  as  a  natural 
course,  that  the  officers  will  require  and 
watch  averages  of  these  earnings  and 
expenses  and  thus  have  a  still  closer 
finger  on  the  pulse  of  the  bank. 

[13] 


INTEREST   ACCRUED   RECEIV- 
ABLE 


CHAPTER  II. 

INTEREST  ACCRUED  RECEIV- 
ABLE 

TN  order  to  start  a  record  of  interest 
-*•  earned  it  will  be  necessary  to  figure 
the  interest  accrued  receivable  after  the 
close  of  business  on  a  given  day  on  all 
bonds  owned,  on  all  bonds  and  mort- 
gages, and  on  all  demand  and  time  loans. 
Then  head  an  ordinary  piece  of  analysis 
paper  or  a  page  in  a  suitable  columnar 
book,  as  shown  in  Figure  2.  These  sheets 
will  be  referred  to  hereafter  as  "Accrual 
Sheets."  Use  one  sheet  or  one  page  for 
demand  loans,  another  for  time  loans, 
another  for  bonds,  and  still  another  for 
bonds  and  mortgages.  Then  analyze  the 
loans  according  to  rates  and  prove  the 
totals  with  the  general  ledger.    This  clas- 

[17] 


ACCRUED    INTEREST 

sification  may  be  made  upon  the  sheets 
above  referred  to,  though  it  will  make  a 
cleaner  record  if  the  analysis  is  made  on 
separate  sheets  and  the  totals  transferred 
to  the  accrual  sheets. 

Bonds  are  carried  on  the  books  of 
banks  in  one  of  several  ways  and  the 
manner  of  carrying  them  on  the  general 
ledger  will  determine  how  they  shall  be 
entered  on  the  accrual  sheet.  Suppose, 
for  example,  that  we  have  a  $1,000  bond, 
purchased  at  80,  bearing  interest  at  5  per 
cent.  The  investment  of  $800  earns  $50 
each  year,  which  is  at  the  rate  of  6.25 
per  cent. 

If  a  bank  should  follow  the  practice  of 
carrying  its  bond  investments  at  par,  the 
bond  referred  to  should  be  entered  on  the 
accrual  sheet  as  $1,000  under  the  5  per 
cent  rate.  This  is  manifestly  incorrect,  as 
the  bank  has  invested  but  $800  and  this 
amount  is   earning  6.25   per  cent.     The 

[18] 


ACCRUED    INTEREST 


AocRueo    h^ra^EST-  R 

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1 

NloNTM  A)^o  Day 

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[20] 


RECEIVABLE    AND    PAYABLE 


<AB.L£     OAf     DsMAA/O    LOAA/S. 


J-% 

6% 

To7-^L^ 

[21] 


RECEIVABLE    AND    PAYABLE 

bond  should,  therefore,  be  entered  as  $800 
upon  the  books  of  the  bank  and  upon  the 
accrual  sheet  for  that  amount  in  the  6.25 
per  cent  column. 

Some  financial  institutions  carry  bonds 
at  amortized  values.  This  may  be  most 
simply  illustrated  by  taking  a  bond 
bought  at  a  premium.  Let  us  consider  a 
$1,000  bond,  bearing  6  per  cent  interest, 
purchased  at  120,  having  ten  years  to 
run.  Stating  the  matter  in  its  simplest 
terms,  the  institution  invests  $1,200  and 
receives  $30  in  interest  at  each  semi- 
annual interest  period. 

If  this  institution  were  to  credit  all  of 
the  semi-annual  interest  payments  to 
earnings  it  would  find  itself  with  an  un- 
collectible asset  on  its  books  after  the  face 
of  the  bond  had  been  paid  at  maturity. 
In  order  to  provide  against  this  contin- 
gency it  should  "amortize"  or  ''kill"  the 
premium  by  setting  aside  a  definite  pro^ 

[23] 


ACCRUED    INTEREST 

portion  of  the  income  and  crediting  it  to 
the  investment  account. 

Since  the  bond  is  to  be  retired  in  ten 
years  and  there  are  two  interest  periods 
in  each  year,  it  will  be  necessary  to  set 
aside  one-twentieth  of  $200  each  interest 
period.  This  will  take  $10  of  the  $30 
payment,  leaving  $20  as  the  semi-annual 
return.  If  we  multiply  this  by  two  to 
increase  the  interest  earned  to  an  annual 
basis  and  then  divide  by  the  amount  in- 
vested we  find  that  the  actual  earning 
power  of  the  money  invested  is  3  1-3  per 
cent.  The  book  value  of  the  bond,  $1,200, 
should  be  entered  under  this  rate. 

In  order  to  simplify  the  accounting, 
these  semi-annual  deductions  of  $10 
should  be  credited  to  a  resen^e  account 
and  be  used  at  the  maturity  of  the  bond 
to  eliminate  the  premium. 

It  must  be  understood  that  the  above 
presentation  of  the  process  of  amortiza- 
tion of  premium  on  bonds  is  not  mathe- 

[24] 


RECEIVABLE    AND    PAYABLE 

matically  correct.  The  proportion  of  the 
income  set  aside  is  reinvested  and  the  in- 
come received  is  used  to  reduce  the 
amount  that  needs  to  be  deducted  from 
the  interest  payment.  This,  of  course,  in- 
creases the  actual  rate  of  return  upon  the 
investment.  Those  who  are  familiar  with 
the  theory  of  amortization  will  make  the 
proper  adjustments  and  carry  the  invest- 
ment on  the  accrual  sheet  at  the  proper 
rate. 

If  bonds  are  bought  on  a  basis  valua- 
tion and  carried  at  cost,  the  columns 
must  be  headed  with  these  odd  rates  and 
the  actual  book  value  entered. 

Having  prepared  these  schedules, 
proved  the  totals  with  the  general  ledger, 
and  having  figured  the  accrued  interest 
receivable,  the  following  entries  should  be 
prepared  and  passed  through  the  books 
in  order  to  establish  the  earning  accounts 
on  the  proper  basis: 

[25] 


ACCRUED    INTEREST 

Interest  Accrued  Receivable — Demand  Loans 
Interest  Accrued  Receivable — Time  Loans 
Interest  Accrued  Receivable — Bonds 
Interest  Accrued  Receivable — Bonds  and  Mortgages 
to 

Interest  Earned — Demand  Loans 

Interest  Earned — Time  Loans 

Interest  Earned — Bonds 

Interest  Earned — Bonds  and  Mortgages 

The  effect  of  these  entries  is  obviously 
to  credit  the  earning  accounts  with  the 
amount  of  all  interest  accrued  to  the  date 
the  entries  go  through  the  books  and  to 
establish  contra  accounts  to  offset  the 
credits  so  made.  When  cash  is  received 
on  account  of  interest  it  is  credited  to 
these  debit  accounts  instead  of  to  the 
earning  accounts. 

If  desired,  the  general  ledger  debit  and 
credit  accounts  may  be  combined  into  one 
for  the  debits  and  one  for  the  credits. 
This  will  reduce  the  number  of  entries 
passing  through  the  general  ledger  each 

[26] 


RECEIVABLE    AND    PAYABLE 

day.  The  accrual  figures  should,  how- 
ever, be  kept  on  separate  sheets,  so  that 
proofs  may  be  made  from  time  to  time. 
Having  passed  entries  transferring  in- 
terest accrued  into  earnings  nothing  more 
needs  to  be  done  until  the  day  following. 
Let  us  assume  that  the  accruals  have 
been  figured  to  the  close  of  business 
Tuesday,  JMarch  4,  that  the  figures  have 
been  entered  on  the  accrual  sheet  as 
shown  in  Figure  3,  that  Interest  Earned 
on  Demand  Loans  has  been  credited  with 
$1,532.77  and  that  a  contra  accoimt,  In- 
terest Accrued  Receivable  on  Demand 
Loans  has  been  charged  with  a  like 
amount.  The  entries  which  follow  will 
then  carry  the  accruals  through  the  books 
for  a  period  of  one  week. 

On  Wednesday,  March  5,  three  new 
loans  are  made,  $1,000  at  4  per  cent, 
$5,000  at  5  per  cent  and  $10,000  at  6 
per  cent.     These  are  entered  on  the  ac- 

[27] 


ACCRUED    INTEREST 

crual  sheet  in  black  ink,  as  shown  in 
Pigure  3.  No  other  changes  are  made  in 
the  demand  loans  on  Wednesday,  so  new 
totals  are  brought  down. 

One  day's  interest  is  then  figured  on 
these  new  totals  as  follows: 

One  day's  interest  on  $101,000  at  4,%.$il£l 
One  day's  interest  on  155,000  at  5%.  21M 
One  day's  interest  on    860,000  at  6% .    60.00 

Total $92.71,, 

Entries  are  then  passed  as  follows: 

Interest    Accrued    Receivable 

Demand    Loans .$92. H 

to 

Interest  Earned  Demand 

Loans    $92.71^ 

The  total  interest  for  the  one  day  is 
then  entered  in  the  last  column  on  the 
accrual  sheet  in  black  ink,  and  a  new 
total  brought  down.  This  represents  the 
accrued  interest  receivable  but  not  paid 

[28] 


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RECEIVABLE    AND    PAYABLE 

at  the  close  of  business  Wednesday,  or 
more  properly  speaking  at  the  opening 
of  business  Thursday  morning. 

No  loans  were  made  on  Thursday,  but 
two  loans  were  paid  with  interest.  One 
of  these  was  $6,000  and  with  it  was  re- 
ceived interest  for  thirty-one  days  at  4 
per  cent,  amounting  to  $20.67;  the  other 
was  $15,000,  on  which  the  interest 
amounted  to  $51.66.  These  loans  are 
entered  in  red  ink  in  their  respective 
columns  and  the  total  interest  received, 
$72.33,  is  entered  in  red  in  the  accrued 
receivable,  net,  column  at  the  right.  New 
totals  are  struck.  Entries  are  passed 
covering  the  payments  as  follows: 

Cash    $21,072,38 

to 

Demand    Loans...  $21,000.00 

Interest        Accrued 

Receivable     72.SS 

One  day's  interest  is  then  figured  on 

[33] 


ACCRUED    INTEREST 

the  new  balances  at  the  proper  rates  aa 
follows : 

One  day's  interest  on  $95,000  at  i%, $10,55 
One  day's  interest  on  HOfiOO  at  5%.  1946 
One  day's  interest  on  860,000  at  6%.    60.00' 

Total    $90M 

Entries  are  passed  as  follows: 

Interest    Accrued    Receivable 

Demand  Loans $90,01 

to 

Interest  Earned  Demand 

Loans     $90,01 

Friday's  business  shows  loans  made 
and  loans  paid  at  varying  rates,  but  it 
makes  no  difference  how  many  or  how 
few  transactions  are  passed  through  the 
books,  or  whether  they  are  entered  on  the 
accrual  sheets  in  detail  or  en  bloc.  The 
onlj^  requisite  is  that  thej^  be  entered 
correctly  or  there  will  be  trouble  when 
proving  the  interest  accrued  receivable 
account. 

[34] 


RECEIVABLE    AND    PAYABLE 

After  the  close  of  business  Friday,  the 
interest  is  figured  as  before  on  the  new 
balances : 

One  day's  interest  on  $95,000  at  4%  .$10,55 
One  day's  interest  on  135,000  at  5%.  18.77 
One  day's  interest  on  365,000  at  6% .   60.88 

Total    $90.15 

The  usual  entries  are  passed: 

Interest    Accrued    Receivable 

Demand  Loans $90.15 

to 

Interest  Earned  Demand 

Loans    $90.15 


The  sheet  shows  that  no  loans  were 
made  or  paid  on  Saturday,  so  all  that 
needs  to  be  done  is  to  repeat  the  accrual 
figures  used  on  Friday,  $90.15,  enter  the 
amount  in  black  in  the  last  column  and 
strike  a  new  balance  and  pass  the  usual 
entries. 

On  Monday  two  sets  of  figures  must 

[351 


ACCRUED    INTEREST 

be  prepared  in  ease  there  is  action  of  any 
kind.  One  of  these  is  to  repeat  the 
accrual  for  Sunday  and  the  other  to  take 
care  of  Monday's  earnings.  The  sheet 
shows  changes  in  the  loans  on  Monday 
and  the  following  calculations  are  neces- 
sary : 

One  day's  interest  on  $100,000  at  i%  ,$11.11 
One  day's  interest  on  11^.0 fiOO  at  5% .  1946 
One  day's  interest  on    880,000  at  6%,   68,88 


Total $98.90 

The  interest  for  the  day  is  added  to 
the  last  column,  a  new  total  struck  and 
entries  prepared  in  the  usual  manner. 
This  completes  the  cycle  and  illustrates 
every  kind  of  transaction  that  will  need 
to  pass  through  an  interest  accrued  re- 
ceivable sheet. 

Similar  sheets  should  be  prepared  for 
time  loans,  bonds,  bonds  and  mortgages 
and  for  bank  balances  on  which  interest 
is   received.     In  estimating  the  interest 

[36] 


RECEIVABLE    AND    PAYABLE 

earned  on  bank  balances,  it  will  not  be 
necessary  to  post  the  debits  and  credits 
as  in  the  case  of  loans,  but  to  accrue  for 
one  day  on  the  interest  bearing  balance 
as  nearly  as  that  can  be  determined. 

It  should  be  carefully  noted  that  in- 
terest on  bonds  and  on  bonds  and  mort- 
gages is  figured  on  a  basis  of  twelve 
months  of  thirty  days  to  the  year.  It 
will  be  necessary,  therefore,  to  omit  the 
thirty-first  day  when  accruing  for  the 
thirty-one  day  months  and  to  add  the 
proper  number  of  days  to  bring  Feb- 
ruary's accrual  up  to  thirty  days. 

Bankers  do  not,  as  a  rule,  pay  sufficient 
attention  to  the  average  earning  power  of 
the  money  they  have  invested  in  various 
ways  and  at  sundry  rates.  Two  very 
interesting  and  helpful  percentages  may 
be  obtained  from  these  accrual  sheets  and 
adjusted  daily.  The  first  may  be  called 
the  average  earning  power  of  money  in- 
vested.    It  is  found  by  adding  together 

[37] 


ACCRUED    INTEREST 

the  various  amounts  of  income  from  in- 
vestments, loans  and  the  hke,  as  they  are 
shown  on  the  accrual  sheets.  The  figure 
obtained  must  be  reduced  to  an  annual 
basis  and  then  divided  by  the  total  of  the 
amounts  invested  which  earn  the  interest 
summarized. 

It  is  evident  that  this  rate  will  fluctuate 
through  a  very  narrow  margin,  but  the 
fluctuations  will  indicate  whether  more 
loans  should  be  sought  at  a  higher  rate 
in  order  to  increase  earnings  or  whether  it 
will  be  possible  to  pursue  a  more  conser- 
vative course  by  accepting  investments  at 
lower  rates. 

The  second  average  that  may  be  ob- 
tained may  be  called  "the  effective  earn- 
ing power  of  money."  Banks  must  carry 
non-interest  bearing  reserves ;  they  find  it 
necessary  to  carry  balances  with  other 
banks  to  f acihtate  collections,  for  the  pur- 
pose of  selling  exchange,  and  for  other 

[38] 


RECEIVABLE    AND    PAYABLE 

purposes.  These  non-interest  bearing 
balances  should  be  carried  into  the  base 
and  thus  increase  it  while  the  interest  re- 
mains the  same.  The  rate  obtained  by 
this  process  is  "the  effective  earning  pow- 
er of  money." 

It  is  doubtful  if  this  average  is  of  any 
more  value  than  the  average  return  on 
money  invested,  but  it  is  conceivable  that 
if  a  bank  finds  it  necessary  to  maintain 
the  equipment  mentioned  it  is  fair  to  con- 
sider its  cost  in  some  part  of  the  account- 
ing. 


[89] 


UNEARNED  DISCOUNT 


I 


CHAPTER    III. 

UNEARNED  DISCOUNT 

TN  order  to  establish  the  accounts  neces- 
^  sary  to  show  unearned  discount  it 
will  be  necessary  to  follow  the  procedure 
described  for  accruing  interest  earned  but 
not  received.  The  accounts  to  be  estab- 
lished and  maintained  are  slightly  dif- 
ferent, but  the  process  is  the  same. 

It  will  be  necessary  to  find  the  amount 
of  discount  received  but  not  earned  on  a 
given  date.  Everj^  bank  man  is  familiar 
with  the  process.  When  this  has  been 
determined  entries  should  be  passed 
transferring  the  unearned  discount  from 
the  earning  account  in  which  it  is  carried 
to  a  new  suspense  account  as  follows: 

[43] 


ACCRUED    INTEREST 

Discount  Received 
to 

Unearned  Discount 

The  balance  left  in  the  Discount  Re- 
ceived account  is  all  earned  and  the  title 
of  the  account  should  be  changed  to  Dis- 
count Earned.  All  subsequent  entries 
covering  discount  which  has  actually  been 
earned  will  be  posted  to  this  account. 
The  discount  received  on  all  notes  after 
the  accrual  sheets  have  been  established 
will  be  credited  to  Unearned  Discount. 

The  totals  of  the  bills  discounted  at  the 
various  rates  must  then  be  entered  on 
accrual  sheets  and  the  amount  of  im- 
earned  discount  extended  into  a  suitable 
column.  For  purposes  of  illustration  let 
us  assume  that  the  inventory  of  discounts 
and  the  amount  unearned  at  the  close  of 
business,  Tuesday,  March  4,  are  as  fol- 
lows (see  Figure  4) : 

[44] 


Un£ARa/£  0 

0 

4% 

^Vo 

(> 

ThoA/.  */' 

C> 

ooo 

/6 

oco 

/(. 

o 

/ 

.         S 

.     L 

/ 

o< 

4 

o  o  « 

...-™ 

ooo 

/S 

O    4 

TyujiCcu^ 

7 

loo 

0 

/ 

J 

o 

OaZcuLcLo^ 

.       ? 

L 

&  o  o 

ts 

ooo 

//■<. 

o 

1 

TKyi/^^dLou^ 

"       lO 

^ 

VQO^ 

/J 

ooo 

ic 

0 

1 

'O- 

-o- 

/oe 

O   1 

RECEIVABLE    AND    PAYABLE 

$1,000  two  days  to  run  at  6% $0,38 

5,000  three  days  to  run  at  6% ...   2M0 

15,000  six  days  to  run  at  5% 12,50 

10,000  six  days  to  run  at  6% ,  .  10,00 

6,000  six  days  to  run  at  4% 4^,00 

Total  unearned  discount.  . .  .* $29,38 

After  the  close  of  business  on  Wednes- 
day, March  5,  the  bank  will  have  earned 
one  day's  interest  on  all  its  bills  and  the 
unearned  account  must  be  reduced  by 
that  amount.  This  is  calculated  as  fol- 
lows : 

One  day's  interest  on  $6,000  at  4% $0,67 

One  day's  interest  on  15,000  at  5% 2.08 

One  day's  interest  on  16,000  at  6% 2.67 

Total    $5.4,2 

The  following  entries  are  then  passed 
through  the  books : 

Unearned  Discount $5.4^ 

to 

Discount  Earned   $5.42 

[49] 


ACCRUED    INTEREST 

This  amount  is  then  entered  in  red  ink 
in  the  last  column  on  the  accrual  sheet  as 
shown  in  the  figure  and  deducted  from 
the  balance. 

The  figure  shows  that  a  note  for  $1,000 
discounted  at  6  per  cent  matured  on 
Thursday.  The  discount  earned  that  day- 
must  be  accounted  for  so  the  deduction 
for  the  payment  is  not  made  till  after  the 
discount  earned  has  been  deducted.  There 
is,  therefore,  no  change  to  be  made  in  the 
totals  of  discounts  at  the  various  rates 
and  the  amount  of  discount  used  on  the 
day  previous  must  be  deducted  again, 
leaving  a  balance  of  $18.49  unearned. 
The  usual  entries  must  also  be  passed. 
The  paid  note  is  then  entered  in  red  in 
the  proper  columns  and  new  totals 
brought  down.  These  totals  are  the  basis 
for  the  calculation  of  the  discount  earned 
on  Friday,  which  amounts  to  $5.25. 

The  figure  shows  a  new  discount  made 
on   Friday  of  $100,000   at   6   per   cent, 

[50] 


RECEIVABLE    AND    PAYABLE 

running  for  sixty  days.  The  discount 
received  is  credited  to  Unearned  Dis- 
count and  is  entered  on  the  accrual  sheet, 
together  with  the  amount  of  the  note. 
The  latter  is  entered  in  the  proper  col- 
umn under  the  6  per  cent  rate  and  also 
in  the  total  column.  When  these  entries 
have  been  made  the  balance  in  the  un- 
earned column  after  the  close  of  business 
on  Friday  is  $1,013.24. 

On  Friday,  also,  a  note  of  $5,000  at  6 
per  cent  is  paid  and  is  entered  in  the 
proper  columns  in  red  and  new  totals 
struck.  These  are  used  in  figuring  Sat- 
urdaj^'s  earnings. 

On  Saturday,  the  eighth,  one  day's 
earnings  on  the  new  totals  are  figured 
and  entered  in  red  in  the  proper  column 
and  the  new  balance  carried  down.  The 
daily  earnings  show  a  decided  increase 
because  of  the  $100,000  discount  and  now 
amount  to  $21.08.  After  deducting  this 
amount  there  remains  $992.16  unearned. 

[51] 


ACCRUED    INTEREST 

Before  entering  three  notes  paid  on 
Monday,  the  unearned  discount  column 
must  be  reduced  by  two  day's  interest  on 
the  total  covering  Sunday  and  Monday's 
earnings.  The  total  for  the  two  days,  is 
$42.16.  After  deducting  this  in  the  usual 
manner  there  remains  $950.00  unearned. 

The  notes  maturing  on  Monday  are 
deducted  and  there  remains  but  one  note, 
$100,000,  at  6  per  cent,  with  fifty-seven 
days  yet  to  run.  The  unearned  discount 
on  this  note  is  equal  to  the  balance  in  the 
account,  proving  the  work  of  the  accrual 
sheet. 

If  notes  are  rebated  before  maturity, 
simply  enter  the  face  of  the  note  in  red 
in  the  proper  column  and  deduct  the 
amount  of  the  discount  to  maturity  from 
the  Unearned  Discount  column.  Then 
pass  entries  as  follows: 

Unearned  Discount 
to 

Individual  Deposits 

[52] 


RECEIVABLE    AND    PAYABLE 

Miscellaneous  earnings  may  be  accrued 
daily  in  much  the  same  way.  Take  rents, 
for  example.  These  may  be  calculated 
easily  and  reduced  to  a  per  diem  basis. 
They  may  be  combined,  perhaps,  with 
others,  such  as  safe  deposit  rentals  and 
commissions,  and  carried  in  one  account. 
Each  day,  entries  should  be  passed  sub- 
stantially as  follows: 

Rents,  Etc,  Receivable 
to 

Rents,  Etc,  Earned 

The  cash  receipts  will  be  credited  to 
Rents,  Etc.,  Receivable.  This  will  reduce 
to  a  daily  basis,  every  earning  account 
and  effectively  dispose  of  any  and  all 
violent  fluctuations  in  earnings. 


[53] 


EXPENSES 


CHAPTER  IV. 


EXPENSES 


T^HE  daily  accruing  of  expenses  is 
•*-  neither  so  easy  nor  so  accurate  a 
process  as  accruing  earnings,  but  results 
can  be  obtained  which  will  be  very  satis- 
factory. If  included  in  the  daily  state- 
ment in  the  same  way  as  the  interest  ac- 
crued and  the  discount  earned,  the  result- 
ing statement  will  always  be  up  to  date 
and  violent  fluctuations  of  all  kinds  will 
be  eliminated. 

The  chief  items  of  expense  are: 
Interest  paid  on  deposits. 
Rent. 
Taxes. 
Salaries. 
Stationery,  printing  and  supplies. 

[57] 


ACCRUED    INTEREST 

Furniture  and  equipment. 
Miscellaneous  items. 

The  first  of  these  accounts  causes  the 
most  violent  fluctuations  in  the  expense 
section,  especially  where  interest  is  cred- 
ited quarterly  or  semi-annually.  An 
actual  figure  might  be  found  each  day  by 
running  through  the  ledgers,  taking  off 
all  interest  bearing  balances  and  calcu- 
lating one  day's  interest  on  the  total. 
This,  however,  would  serve  no  other  use- 
ful purpose  and  would  be  a  fearful  waste 
of  effort.  An  estimated  figure  will  prove 
quite  as  satisfactory  and  be  much  easier 
to  obtain.  Moreover,  most  banks  calcu- 
late interest  monthly,  and  when  this  is 
done  the  accrued  figure  may  be  revised 
and  proper  adjustments  made  in  the 
accrual  figure. 

In  order  to  start  this  accrual  the 
average  cost  of  deposits  for  at  least  six 
months  should  be  taken  so  as  to  make  the 
calculation  as  accurate  as  possible.    After 

[58] 


RECEIVABLE    AND    PAYABLE 

having  a  start  the  monthly  revision  of  the 
Tate  and  the  adjustment  of  the  account 
will  keep  the  daily  calculations  so  nearly 
accurate  that  no  one  could  possibly  ques- 
tion them.  For  those  who  have  not  pre- 
pared averages  in  this  way  the  following 
suggestions  may  be  helpful. 

First  find  the  average  daily  deposits 
for  the  period  to  be  reviewed,  by  listing 
the  totals  of  each  day's  deposits  as  they 
appear  on  the  general  ledger.  Then  di- 
vide this  total  by  the  actual  number  of 
days  in  the  period  under  review.  Be 
careful  to  carry  Saturday's  total  in  twice 
so  as  to  provide  for  the  interest  accrued 
on  Sunday.  It  will  be  found  desirable  to 
calculate  these  averages  to  a  natural  clos- 
ing period  when  all  interest  is  paid  or 
credited  so  that  the  accrual  record  may 
be  started  with  a  clean  slate. 

The  next  thing  to  do  is  to  analyze  the 
interest  paid  during  the  period  under 
review  and  eliminate  any  amounts  that 

[59] 


ACCRUED    INTEREST 

represent  interest  payments  on  deposits 
held  prior  to  the  beginning  of  the  period. 
Then  reduce  the  interest  actually  paid 
during  the  period  under  review  to  an 
annual  basis.  Divide  the  estimated  in- 
terest paid  for  one  year  by  the  average 
amount  of  deposits  and  the  result  will  be 
the  average  per  cent  cost  of  deposits. 
Every  step  in  the  process  is  important 
and  the  calculations  should  be  checked 
very  carefully. 

The  estimated  accrued  interest  payable 
should  be  determined  each  day  by  finding 
one  day's  interest  on  the  total  deposits  at 
the  determined  rate.  The  memorandum 
of  this  daily  accrual  should  be  entered  in 
the  proper  columns  in  a  record  similar  to 
that  shown  in  Figure  5, 

Entries  should  be  passed  as  follows: 

Accrued  Interest  Payable 
to 
Reserved  for  Interest  Accrued 

[60] 


ACCRUED    INTEREST 


AcC'?U£0     I^TCf^tST    Paya,BI£ 


D/^Y 

/fee /^(j  so    If^TSf^esT    Pay  f^  a  LB, 

fhr/rt,    Oepo^jrs 

/ff^TB 

Xyr-^ffBST- 

Fi( 


[62] 


RECEIVABLE    AND    PAYABLE 


)     RsSB^VSS    /=o/^    £<Pe/V^£3. 


1 

1 

i 

11 

j 

[63] 

RECEIVABLE    AND    PAYABLE 

The  debit  account  should  be  closed  into 
Profit  and  Loss  at  the  closing  of  the 
books  in  the  same  manner  as  Interest 
Paid.  The  reserve  account  should  be 
charged  with  all  payments  of  interest  to 
depositors. 

Let  us  suppose  that  a  banker  has  before 
him  each  day  a  statement  in  somewhat 
the  following  form: 

Average  earning  power  of  money  in- 
vested     ^.If2S6% 

Average  interest  cost  of  deposits. .  ,2.281^3% 


Gross  profit  on  deposits 2.1893% 

A  banker  who  knows  this  much  about 
his  earnings  knows  also  just  how  much  it 
will  take  to  run  his  bank  for  a  year  and 
to  provide  a  suitable  dividend  and  a  prop- 
er credit  to  undivided  profits.  He  will 
apply  his  rate  of  gross  profit  against  his 
average  line  of  deposits  and  will  not  guess 
that  he  can  afford  to  raise  his  rate  of  in- 
terest a  bit  on  an  attractive  account.    He 

[65] 


ACCRUED    INTEREST 

will  know,  not  guess,  that  he  can  afford 
to  cut  his  rate  of  interest  on  loans,  or  buy 
an  investment  with  a  lower  rate  of  yield 
but  with  correspondingly  higher  security. 
These  percentages  will  be  valuable  only  in 
a  banking  center  where  interest  rates  fluc- 
tuate from  day  to  day  or  week  to  week. 
Some  of  the  other  expense  items  are 
more  or  less  fixed  charges  and  so  may 
easily  be  reduced  to  a  per  diem  basis. 
Others  may  be  estimated  on  the  basis  of 
the  expenses  of  previous  years,  due  allow- 
ance being  made  for  increases  and  de- 
creases due  to  changes  in  operating 
details.  The  per  diem  expense  may  be 
reduced  to  an  exact  figure  by  establishing 
budgets  for  the  various  departments  and 
insisting  upon  their  operating  under  the 
amount  assigned.  Any  process  may  be 
used  so  long  as  it  gives  a  reasonably  ac- 
curate estimate  of  the  daily  current  ex- 
pense. 

[66] 


RECEIVABLE    AND    PAYABLE 

In  order  to  pass  entries  through  the 
books  each  daj^  it  will  be  necessary  to 
charge  Current  Expense  with  the  daily 
accrual  and  to  credit  a  reserve  account, 
which  may  have  any  acceptable  title  such 
as,  Reserved  for  Expenses,  Provision  for 
Disbursements  or  any  other.  The  actual 
expense  bills  should  be  charged  to  the 
reserve  account  when  paid. 

A  brief  study  of  some  of  the  other  ex- 
pense details  may  be  helpful.  Rent,  for 
example,  is  a  fixed  charge.  The  annual 
rental  should  be  divided  by  twelve  and 
then  by  the  actual  number  of  days  in  the 
month  for  which  the  accrual  is  to  be  es- 
tabhshed,  thirty-one  in  January,  twenty- 
eight  in  February  and  so  on. 

Franchise,  real  estate,  income,  war  and 
excess  profits  taxes  should  be  estimated 
and  the  amount  to  be  set  up  in  the  ac- 
crual account  determined  for  each  day  in 
January,  February,  March  and  the  other 
months  in  the  year.     In  each  case  the 

[67] 


ACCRUED    INTEREST 

monthly  amount  should  be  divided  by  the 
actual  number  of  davs  in  the  month,  Sun- 
days  and  holidays  included,  in  order  to 
determine  the  daily  amount  to  be  accrued. 

Salary  expenses  may  be  reduced  to  an 
accurate  daily  basis.  Establish  a  memo- 
randum account  showing  on  the  one  side 
the  total  salary  roll  liability  for  the 
month.  Credit  the  account  with  the  net 
amount  of  all  increases  and  debit  it  with 
the  decreases  also  reduced  to  a  monthly 
basis.  Make  proper  allowances  for  parts 
of  a  month.  Divide  the  resulting  balance 
by  the  number  of  days  in  the  month. 
Revise  the  record  from  month  to  month 
in  order  to  keep  the  accrual  figure  exact. 

The  variable  expense  items,  such  as  sta- 
tionery and  supplies,  telegraph  and  tele- 
phone, car  fares,  light,  heat  and  power, 
etc.,  etc.,  must  be  studied  and  the  amount 
to  be  accrued,  determined  after  careful 
analysis  of  these  items  for  a  period  of  six 
months  or  more. 

[68] 


RECEIVABLE    AND    PAYABLE 

Do  not  fail  to  allow  for  Sundays  and 
holidays  in  full,  for  while  the  vault  door 
may  be  closed,  the  tellers'  cages  vacant 
and  the  bookkeepers'  desks  covered  with 
up-ended  stools,  the  loans  and  invest- 
ments are  working  and  it  is  well  known 
that  interest  on  deposits,  rent,  taxes  and 
salaries  go  on  forever. 

How  analyze  these  new  expense  ac- 
counts for  comparative  purposes?  Well 
perhaps  on  both  sides.  Make  an  elabo- 
rate analysis  of  current  expenses  from 
the  debit  side  of  the  reserve  account  and 
an  extremely  simple  analysis  of  the  credit 
side. 

If  furniture  and  equipment  is  carried 
as  an  asset  an  appropriate  charge  should 
be  made  to  current  expense  each  day  as 
a  depreciation  charge.  If  charged  to 
Current  Expense,  as  bought,  include  in 
the  budget  or  estimate  and  accrue  in  the 
same  manner  as  other  items. 

Among  the  expenses  of  a  bank,  as  well 

[69] 


ACCRUED    INTEREST 

as  any  other  business,  are  some  that  are 
paid  in  advance.  Among  these  items  are 
premiums  on  fidelity  bonds,  fire  insur- 
ance, some  times  a  part  of  the  real  estate 
tax.  As  a  rule,  they  are  so  small,  com- 
pared with  other  expense  items,  that  they 
are  not  considered  as  assets.  If  they 
comprise  an  appreciable  part  of  the  ex- 
pense account  they  should  be  distributed 
daily  by  charging  the  payments  to  Ex- 
penses Paid  in  Advance  in  the  first  in- 
stance and  then  by  charging  Current 
Expense  in  the  daily  accrual  and  credit- 
ing Expenses  Paid  in  Advance.  Other 
earnings  and  expenses,  if  any,  should  be 
reduced  to  a  daily  basis  and  entered  on 
the  accrual  sheets. 


[70] 


THE  DAILY  STATEMENT 


CHAPTER  V. 

THE  DAILY  STATEMENT 

T^TOW  let  us  see  what  we  have  accom- 
^  ^  plished.  Let  us  not  forget  that  we 
are  not  correct  in  calling  the  set  of 
figures  presented  each  morning  by  the 
general  bookkeeper,  The  Daily  State- 
ment. A  statement  of  condition,  and 
that  is  what  the  term  "statement"  means, 
should  not  include  current  earnings  and 
current  expenses.  It  would  not,  if  pre- 
sented in  the  best  of  form,  show  real  es- 
tate owned  on  one  side  and  reser\^e  for 
depreciation  of  real  estate  on  the  other, 
but  would  show  the  reserve  for  deprecia- 
tion as  a  deduction  from  the  real  estate. 
The  figures  presented  by  the  general 
bookkeeper  should  be  called  a  Trial  Bal- 
ance   of    the    General    Ledger,    but    we 

[73] 


ACCRUED    INTEREST 


wouldn't  get  the  book  if  we  touched  the 
buzzer  and  called  for  it  in  that  way,  so 
we  shall  stick  to  the  term  Daily  State- 
ment. 

The   ordinary   daily   statement   shows 
the  following: 


LOANS 

Demand  Loans 
Time    Loans 
Bills  Discounted 


CAPITAL  ACCTS. 

Capital 

Surplus 
Undivided  Profits 


INVESTMENTS 
U.  S.  Bonds 
Other  Bonds 
Real  Estate 

CURRENT  EXPENSE 

DUE  FROM  BANKS 
AND  CASH  ITEMS 

RESERVES 


EARNINGS 

Discount 
Interest 
Exchange 
Sundry  Profits 

DEPOSITS 
Banks 
Individuals 
Certified  Checks 
Cashier's  Checks 


TOTAL 
RESOURCES 


TOTAL 
LIABILITIES 


[74] 


RECEIVABLE    AND    PAYABLE 

This  is  elaborated  upon,  sometimes  in 
great  detail,  frequently  without  regard 
to  the  natural  grouping  of  the  accounts, 
but  the  general  principles  are  the  same 
in  practically  every  banking  institution 
in  the  country.  The  resource  side  shows, 
loans,  investments,  current  expense,  due 
from  banks  and  cash  items  and  reserves. 
The  liability  side  shows,  capital  accounts, 
earnings  and  deposits.  Many  banks  in- 
sert a  section  between  earnings  and  de- 
posits for  reserves  and  other  suspense 
accounts. 

If  accounts  are  set  up  in  accordance 
with  the  foregoing  pages,  the  reserve  sec- 
tion on  the  liability  side  will  be  active 
and  a  new  section  will  be  needed  on  the 
resource  side  for  suspended  items  such 
as  Interest  Accrued  Receivable,  the  off- 
set to  the  daily  credits  to  earnings.  If 
the  entire  programme  is  carried  out  as 
set  forth  the  daily  statement  will  appear 
as  follows: 

[75] 


ACCRUED  INTEREST 


RESOURCES 

LOANS 

Demand  Loans 
Time  Loans 
Bills  Discounted 

INVESTMENTS 
U.  S,  Bonds 
Other  Bonds 
Real  Estate 

SUSPENDED  ITEMS 

Interest  Accrued 

Receivable 
Rents  Receivable 
Accrued  Interest 

Payable 
Expenses  Paid  in 

advance 

CURRENT  EXPENSE 

DUE  FROM  BANKS 
AND  CASH  ITEMS 

RESERVES 

TOTAL 

RESOURCES 


LIABILITIES 
CAPITAL  ACCTS. 

Capital 
Surplus 
Undivided  Profits 

EARNINGS 

Discount  Earned 
Interest  Earned—Loans 
Interest  Earned—In- 
vestments 
Rents   Earned 
Exchange 
Sundry  Profits 

SUSPENSE  AC- 
COUNTS 

Unearned  Discount 
Reserve  for  Interest 

Accrued 
Provision     for    Dis- 
bursements 

DEPOSITS 
Banks 
Individuals 
Certified    Checks 
Cashier's  Checks,  Etc. 

TOTAL 
LIABILITIES 


RECEIVABLE    AND    PAYABLE 

It  needs  only  a  little  imagination  to 
see  that  some  interesting  comparative 
statements  may  be  prepared  from  the  fig- 
m'es  we  have  been  studying.  Let  us  pre- 
pare another  sheet  showing  the  total  loans 
in  one  column  and  in  an  adjoining  column 
the  interest  earned  and  next  to  that  the 
average  rate  earned,  carried  out  five  or 
six  places.  Let  us  set  up  other  sets  of 
columns  showing  total  investments,  the 
interest  earned  and  the  rate.  Let  us  do 
the  same  for  discounts  and  the  other 
earning  accounts. 

Let  us  then  set  down  the  amount  of 
deposits,  the  estimated  amount  of  inter- 
est payable  and  the  rate.  Let  us  add, 
also,  columns  for  each  of  the  expense  re- 
sent accounts  estabhshed. 

Then  let  us  assemble  the  earnings  into 
one  column  and  the  expenses  into  another 
and  show  the  net  gain  or  loss  in  an  ad- 
joining column. 

Let  us  write  all  of  these  figures  on  the 

[77] 


ACCRUED    INTEREST 

first  line  across  a  sheet  for  the  first  day  of 
the  month  and  those  for  the  second  day 
on  the  second  line,  and  so  on  throughout 
the  month.  When  we  get  a  full  year  let 
us  compare  this  month  with  last  month 
and  with  the  same  month  of  last  year. 
Let  us  compare  j^ear  to  date  with  year 
to  date. 

Now  suppose  that  the  bank  president 
has  such  a  statement  on  his  desk  each  day 
showing  regular  and  normal  changes 
accruing  gradually  to  the  fateful  June 
thirtieth  and  December  thirtj^-first.  What 
an  improvement  that  would  be  over  the 
figures  that  actuallj^  work  out  from  the 
old  method  of  taking  discount  into  earn- 
ings when  received  and  entering  expenses 
when  the  bills  are  paid  regardless  of  the 
period  covered? 

What  an  improvement  it  would  be  to 
know  exactly  where  the  bank  stands 
every  morning  in  its  actual  surplus  as 
well  as   in  the  volume   of   its   deposits, 

[78] 


RECEIVABLE    AND    PAYABLE 

loans,  investments,  due  from  banks,  and 
cash? 

One  enthusiast  for  daily  analysis  in 
other  lines  of  business  has  termed  the 
process  of  daily  accruals  "The  Science  of 
Economy."  He  argues  that  if  all  con- 
cerns knew  from  daj^  to  day  just  how 
their  earning  and  expense  accounts  were 
progressing  they  would  not  be  so  enthu- 
siastic about  the  success  of  their  enter- 
prises. There  would  be  no  failures,  he 
says,  because  every  business  man  would 
know  exactly  where  he  stands  at  all  times 
and  would  liquidate  before  the  crash. 
This  would  save  coimtless  losses  and  the 
banks  would  be  happy  ever  after. 

Bank  accounting  is  a  simple  process. 
Most  of  the  general  figures  are  demanded 
daily.  Why  not  go  a  step  further  and 
make  them  tell  the  truth? 


[79] 


1 


APPENDIX 


J 


I 


HOW  TO    CALCULATE    INTER- 
EST   ACCRUED    AND    UN- 
EARNED DISCOUNT 

INTEREST 

NTEREST  on  bonds  and  on  bonds 
and  mortgages  is  always  figured  on 
what  is  called  the  month-and-day  basis. 
This  means,  simply  that  the  number  of 
days  in  the  period  is  ascertained  by  count- 
ing each  full  month  in  the  period  as  thirty 
days  regardless  of  the  number  of  days  in 
the  month.  The  odd  days  are  added.  For 
example:  In  the  period  from  April  1st 
to  July  15th  there  are  three  months  and 
fifteen  days,  or  one  hundred  and  five 
days. 

Investments  in  bonds  and  bonds  and 
mortgages  are  made  for  long  periods  of 
time.  Arrangements  are  made  in  ad- 
vance of  the  needs  and  there  is  abundant 
opportunity  to  adjust  the  interest  periods 

[83] 


ACCRUED    INTEREST 

to  the  dates  most  satisfactory  to  all  con- 
cerned. The  interest  is,  therefore,  paid 
periodically  and  at  stated  periods,  usually 
semi-annually. 

Loans  are  made  at  any  time.  Some 
may  be  paid  at  any  time.  It  is  obvious, 
therefore,  that  a  month-and-day  basis  of 
calculating  interest  would  not  be  equi- 
table. The  practice  is  to  charge  interest 
for  the  actual  number  of  days  the  money 
is  lent.  A  simple  rule  for  finding  the 
number  of  days  is  to  count  the  nights 
intervening. 

In  each  case  a  day  is  one-three-hun- 
dred-sixtieth of  a  year.  The  tables  are 
known  as  360-day  tables. 

For  the  purpose  of  illustrating  the 
method  of  calculating  the  interest  accrued 
receivable  on  bonds  owned  by  a  hj^potheti- 
cal  bank  let  us  assume  that  its  entire  in- 
vestment in  bonds  at  the  close  of  Decem- 
ber 31, 1917,  consisted  of  the  bonds  shown 
in  Table  No.  1. 

[84] 


RECEIVABLE    AND    PAYABLE 


o 

o 
o 


o 
o 


o 
o 


o 

o 
o 


Oi      (M       ?o 

»-l         ©i         r-» 


o     o     o 

O       (N       O 
CO        ^        O 


o 


o 


1^ 


I  <  --i  ^'  --i  p^'  ;§  ^'  "-J  ^ 


00 


a 
o 

«    .2 
I    O 


c3 

pq 


00  ^  l^ 

'^f  CO  ^ 

Oi  S  o 

^  S  <N 


^  ^  ^ 

:   ^    ^. 

"^     .    s 


CO 
Oi 


00 


W5 


09 


^  ^ 


=3    ^ 


a; 


« 

«     ^ 


o 


Oh 
d 


tf        '^ 


6 


^     ^     ^ 


o 

a 

be 


Ph 


a 

o 

2 


O 


o 

H 

m 

< 
Eh 


®    o 

d      O 

>    6^ 


0. 


€e- 


o 
o 
o 


2  ® 

2  ® 

»rr    o"  o" 

iF-^     CO  01 


o     c 
o     o 


[85] 


o 
o 
o 


o  o 

0  o 

cT  »o 

01  ^ 


o 
o 

CO 
CO 


ACCRUED    INTEREST 


"S  » 

O 

o     o 

o 

CO 

CO 

o 

i> 

o 

CO 

9  ® 

O 

c 

o 

o 

CO 

^ 

o 

1-H 

o 

»-< 

o5 

6 

iC 

6 

6 

00 

6 

d 

d 

iO 

'^' 

Sc 

o 

t-     o 

M5 

o 

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CO 

o< 

b- 

CO 

<{»5 

(M 

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©^ 

(N 

o 

;^ 

;?J 

;^ 

^e- 

P4 

^ 

« 

^ 

^ 

iO 

'<? 

^ 

CO 

-^ 

© 

o 

o     o 

^ 

o 

o 

o 

^ 

o 

^ 

o 

c 

O 

^ 

o 

o 

o 

o 

> 

o 

c 

o^ 

o 

o^ 

o 

o 

o 

o 

•N 

•\ 

»N 

o 

IC 

o 

o 

o 

iO 

00 

o 

W5 

&4 

T-H 

»— 

CO 

9^ 

i-< 

CI 

1— < 

■ee- 

^' 

^5 

2| 

^ 

rC 

CO 

^ 

05 

02 

^ 

lO 

»o 

^ 

•*- 

-^ 

^-> 

4i^ 

i4^ 

•♦li 

»^ 

s'^ 

a 

? 

a 

P 

a 

G 

fl 

, 

. 

C9 

Sc 

o 

c 

o 

o 

o 

o 

o 

o 

o 

a 

£ 

a 

a 

a 

a 

a 

a 

a 

6 

CO 

^ 

^ 

?o 

JO 

•* 

f— > 

o 

r^ 

4J 

h3 

Sti 

rH 

.^^ 

rH 

f-^ 

rH 

K-H 

rM 

kO 

ud 

n 

^ 

c 

> 

^ 

ti) 

U 

^. 

1-H 

♦JM   >» 

U 

a. 

O 

p 

p 

D 

C^ 

a; 

o 

o 

c 

^ 

>-5 

<: 

CC! 

Q 

Q 

12: 

00 

oc 

^ 

1> 

eo 

t^ 

lo 

i> 

C<l 

'^ 

-«? 

CO 

"^ 

w 

CO 

^ 

^ 

•^ 

a 

a 

05 

O 

a 

a 

Oi 

o 

Oi 

rH 

»" 

fH 

N 

*"* 

1-^ 

T-S 

1-^ 

'<3^' 

;^ 

IQ 

; 

• 

•d 

^ 

^^ 

rt 

-<?* 

;?? 

o 

"^ 

«: 

Q 

4^ 

i 

eo 

o 

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a 

.4^ 

W 
r- < 

d 

PQ 

4J 

or 

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OP 

d 

05 

c3 
6 

o 

3 

O 

3 

[86] 

RECEIVABLE    AND    PAYABLE 

Let  US  also  assume  that  it  has  been  the 
practice  to  credit  interest  to  earnings  only 
when  received  and  that  it  is  planned  to 
begin  to  accrue  interest  daily  on  January 
1st.  It  will  then  be  necessary  to  calculate 
the  interest  earned  bj^  the  bonds,  but  not 
yet  received,  as  at  the  close  of  business 
December  31st.  It  will  be  helpful  to  con- 
struct a  table  so  that  the  calculations  may 
be  made  in  a  uniform  manner.  They  will 
appear  as  in  Table  No.  2. 

In  order  to  present  the  matter  as  simply 
as  possible  the  par  values  and  the  nominal 
interest  rates  were  used  in  the  above  cal- 
culations. On  this  basis  the  total  amount 
of  interest  accrued  but  not  entered  is 
$1,234.16.  Entries  should  be  passed  as 
follows : 

Debit 

Interest  Accrued  Receiv- 
able—Bonds   $1,2SJ^,16 

Credit 

Interest  Earned — Bonds $1,284^.16 

[87] 


ACCRUED    INTEREST 


Q 

Z 

O 

o 

» 

o 

jz; 

^ 
w 

o 

o 

w 

*i 

o 

m 

o 

g 

U9 

o" 

H 

i-H 

U 

^■ 

H 

^ 

o 

o 

o 

o 

Q 

9. 

•N 

H 

'<4* 

o 

w 

P 

cq 

O 

€©• 

o 

o 

Q 

< 

^ 

o 
o 

•N 

H 

^ 

o" 

o 

»o 

QQ 

fH 

CO 

« 

^- 

ai 

? 

o 

H 

^ 

o 

iz; 

o 

l-H 

CO 

o       f^ 

> 


CO 
0^ 


o 

o 

o 


o 
o 
o 


€6- 

g 

o 


o 

o 


o 
o 
o 

o" 

CO 

^• 

o 
o 
o 

o" 

en 

o 


o 


Q 


[88] 


RECEIVABLE    AND    PAYABLE 

The  tickets  should  contain  an  explana- 
tion somewhat  as  follows: 

To  credit  earnings  with  the  amount  of 
interest  earned  on  investments  to  Janu- 
ary 1,  191 — ,  as  per  schedule  attached. 

Then  attach  a  copy  of  the  calculation 
shown  in  the  above  table. 

Next,  enter  the  bonds  on  the  accrual 
sheets  described  in  the  text  and  illustrated 
on  pages  30  and  31.  The  accrual  sheet 
will  appear  as  in  Table  No.  3. 

Then  proceed  as  described  in  the  text 
beginning  at  page  17. 

DISCOUNT 

The  situation  is  exactly  the  reverse  in 
the  case  of  discounts.  We  have  a  great 
many  notes  varying  in  amounts  and  in 
length  of  unexpired  terms.  The  discount 
for  the  unexpired  term  is  unearned  even 
though  it  has  been  credited  to  earnings. 

In  order  to  determine  the  amount  of 

[89] 


ACCRUED    INTEREST 

this  unearned  discount,  we  must  determine 
the  time  to  maturity  of  each  note  and  cal- 
culate the  discount.  The  simplest  method 
is  to  reduce  each  note  to  a  one-day  basis 
by  multiplying  the  amount*  by  the  number 
of  unexpired  days.  Summarizing  records 
should  be  set  up  in  the  manner  as  shown 
in  Table  Xo.  4. 

If  discounts  are  all  made  at  the  same 
rate  much  work  may  be  saved  by  taking 
the  total  of  the  tickler  for  each  day  in- 
stead of  the  individual  notes,  as  in  Table 
No.  5. 

If  this  plan  is  followed,  it  might  be 
well  to  check  the  notes  to  the  tickler  be- 
fore starting  so  as  to  be  sure  that  all  notes 
are  entered  and  entered  correctly. 

Since  these  summary  sheets  are  prepared 
by  rates,  the  totals  of  each  will  furnish 
inventory  figures  for  the  unearned  dis- 
count sheet  shown  on  pages  46  and  47. 

It  would  be  well  to  prepare  the  interest 
and  discount  summaries  so  that  they  can 

[90] 


RECEIVABLE    AND    PAYABLE 


c      ® 


«M   CD   * 

or  ® 


O 

q 


o 

q 

CO 


C3 
C3 


CO 


c3 

OS 

o 

o 

o 

o 

o 

•-5 

-d 

o 

o 

o 

o 

o 

▼H 

o 

»o 

o 

q^ 

iO 

•N 

•N 

O 

P 

o 

00 

'^ 

oT 

o" 

"*^ 

%^ 

CO 

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4i3 

f 

•ee- 

rH 

(M 

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^ 

o 

< 

u 

OQ 

5 

o 

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■g 

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o 

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o 

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s 

O 

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iO 

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Q 

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[ 

91] 

d 

ACCRUED    INTEREST 


^SS    o 

C  O  w        U3 


O 


1> 

CO 


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o 


00 

06 


d 


•tJ 

0 

0 

0 

0 

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CQ 

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00        CO 


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CI        00 


to       CO 


5      c 


«3        03 


[92] 


RECEIVABLE    AND    PAYABLE 

be  preserved  for  future  reference.  If  the 
work  is  proved  by  calculating  the  discount 
on  each  note  or  group  of  notes  and  also 
on  the  total  for  one  day  the  working 
papers  may  not  be  referred  to  again. 
One  can  never  tell,  however,  when  old 
working  papers  will  be  needed  to  settle 
some  knotty  problem.  They  should  be 
held  until  the  interest  accrued  receivable 
and  the  unearned  discount  accounts  have 
been  proved  two  or  three  times. 


[93] 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN  INITIAL  FINE  OF  25  CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  50  CENTS  ON  THE  FOURTH 
DAY  AND  TO  $1.00  ON  THE  SEVENTH  DAY 
OVERDUE. 


AfR  9     1934 


"TTTTi       ?  r> 


R£C.  CIR.  m2(f^^ 


YB  18240 


415514 


UNIVEP^ITY  OF  CAUFORNIA  LIBRARY 


%*■"  ^}^ 


:  ..iimwmAmmi 


